How Far Does a Franchise Non-Compete Reach?

Perhaps without exception, franchise agreements include post-termination non-competes and non-solicitation.

A non-compete prevents the franchisee from owning or working for a business that competes with the franchise.
A non-solicitation prevents the franchisee from contacting the customers of the franchise business to offer products or service that are offered by the franchise business.

Non-competes and non-solicitations span during the franchise agreement and post the termination, expiration, or transfer of the franchise.  The enforceability of the franchise agreement’s non-compete and non-solicitation is dependent on state law.  Except for the case of California, non-competes and non-solicitation are enforceable if the duration of the non-compete is reasonable as to time and duration.

The general rule is that a non-compete and non-solicitation is only enforceable against the signers of the non-compete and non-solicitation.  However, this case provides an all too common exception.  The case is The Maids Int’l, Inc. v. Maids on Call, LLC. 

In this case, Plaintiff franchisor and Defendant franchisee entered into franchise agreements for the operation of the a The Maid franchises.  Franchisor terminates the franchise agreements for under-reporting gross revenues and failure to pay royalties.

Post the termination of the franchise agreement, franchisee’s daughter opened a business called Two Sisters that offers maid services at the same location and used the same Facebook page email as the former franchise business.  The location which the Two Sisters operated continued to bear the signage of the former franchise business.  Two Sister used the same vehicles that were registered to the former franchise.  The form franchisee sent a retirement letter to its customers that said:

SARA, STACEY and MILLIE are ready to take over. (They really have been running the business for many years)………..most everything will remain the same,”

No. 8:17CV208 Business Franchise Guide - Explanations, Laws, cases, rulings, new developments ¶16,047 http://www.wkcheetah.com/?window=document&cpid=WKUS-Legal-Cheetah#/read/2f4740387cda1000ac1c90b11c18cbab017!csh-da-filter!WKUS-TAL-DOCS-PHC-%7B4A1F7BEF-FFD4-4348-9D22-81311C5BA95F%7D--WKUS_TAL_11587%23wkusa59bc1eda5dc7d31154eda7cfd249493?searchItemId=&da=WKUS_TAL_11587

The court found privity and connectivity between the franchisee and Two Sisters.  Therefore, despite Two Sisters being a separate corporation with different owners, the non-competition and non-solicitation under the franchise agreement were enforceable again Two Sisters.  The court ordered Two Sister [in addition to the Franchisee and franchisee owners] to:

  • Stop using the franchise marks- i.e., remove the signage
  • Stop offering offer and providing service in violation of the non-compete
  • Stop soliciting the franchise business customers

An extraordinary outcome.  Would have been the same outcome if Two Sister had not been owned in part by the franchisee’s daughter?

 

 

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